Can A Franchisee Terminate their Franchise Agreement?

February 13, 2015 (Updated on July 10, 2019)

When you enter into a franchise agreement, the assumption is that you will operate under the agreement for the length of time stated in the agreement. To be able to terminate the franchise agreement early, you need to show that this assumption does not apply. This article explains the different grounds on which you, as a franchisee, can terminate your franchise agreement.

1. Leave the Franchise Within Seven Days of Signing the Agreement

You can terminate your agreement within seven days of signing the agreement or making payment under the agreement. This is called the ‘cooling-off period’. During this period, you can terminate with no consequences.

Note that the cooling-off period only applies to new franchises and not to renewal, extension or transfers of existing franchises.

Once the franchisor receives a cooling-off notice, they must refund all of your payments made under the franchise agreement. However, they are not obliged to refund reasonable costs incurred up to the point of termination. The franchisor can retain certain costs, such as:

legal fees;
training costs; or
administrative expenses incurred to recruit you (the franchisee).

If you have second thoughts after entering your franchise agreement, the earlier you notify the franchisor, the better.

It is essential you do as much due diligence before signing the agreement. If you terminate after the cooling-off period, you will likely face significant costs for breaking the agreement.

2. Mutually Agree With the Franchisor to Walk Away

You could speak with the franchisor and explain the difficulties you are experiencing.

For example, you could be struggling to make a profit or perhaps you want to take on a different opportunity.

It may be worth explaining your difficulties to the franchisor and trying to negotiate an early termination. The franchisor may decide to allow you to exit early with some mutually agreed arrangement. However, this is solely at the discretion of the franchisor, and there is no guarantee of a positive outcome.

Alternatively, the franchisor may suggest ways they can assist you. As a franchisor is obliged to disclose the number of franchisees that have terminated the agreement, they have a vested interest in your success.

3. Argue the Franchisor Breached the Agreement or the Code

Finally, you can consider whether the franchisor is in breach of the agreement or the Franchising Code of Conduct. Generally, proving that the franchisor is in breach will require more than a minor breach.

For example, claiming that the franchisor’s marketing is ineffective is unlikely to amount to a breach of the agreement.

It is also difficult to argue a breach based on the franchise’s poor profitability. It is common for the franchisor to estimate possible profits that the franchise will make. However, the franchisor must provide evidence to support their claims. If the franchisor promises certain profits without providing evidence of how they came to those figures, this could be a misrepresentation and amount to a breach of the agreement or Code.

An example of a breach of the Franchising Code by the franchisor is a misrepresentation. A franchisor will breach the Code if they make a false statement to get you to enter into the agreement.

For example, your franchisor tells you that the cost of setting up a franchise will not exceed $400,000. However, if you rely on this information and it ends up costing you twice as much, that could constitute a breach.

Another example is if you enter into the agreement and find out later that the franchisor owns a similar business. If that business may have an impact on your business, but the franchisor did not disclose that to you before you entered into the agreement, this could constitute a breach.

It is not easy to prove franchisor misrepresentation to terminate a franchise agreement. You will need to prove that the franchisor made a false statement to get you to enter into the franchise.

Key Takeaways

If you are looking to terminate your franchise agreement and you are no longer within the cooling-off period, you will usually be bound to the agreement. However, you may be able to negotiate an early termination with the franchisor, or you may be able to prove that the franchisor breached the franchise agreement. If you have questions about terminating your franchise agreement, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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